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The present value of a future sum of money is inversely related to both the number of years
until the payment will be received and the opportunity rate.
At a positive rate of interest, present value will be less than future value with the difference
reflecting the opportunity cost of funds given up.
Future Value
Future value reflects appreciation of a present lump sum over time so as to return to the
lender principle plus interest.
Money has future value because resources relinquished today will grow at the real rate
lenders require to forego present consumption.
Annuity
An annuity is a series of equal dollar payments for a specified number of years.
A. Ordinary Annuity
This assumes that payments are paid or received at the end of the period.
Note: Both FVIFA and PVIFA tables assume ordinary annuities where payments are paid or
received at the end of the period.
B. Annuities Due
Assumes that payments are made/received at the beginning of the period
Note: The number of payments, n, is the same as an ordinary annuity
Perpetuities
A perpetuity is an annuity with an infinite number of payments (PMT)
or
A perpetuity is an annuity that continues forever, that is every year from now on this
investment pays the same dollar amount.